Finance sources of Finance

Finance Sources of Finance

• Internal Sources
• Retained profit/working capital
• Family and friends
• Cut down stock levels
• Personal Capital/Owners funds
• External Sources
• Long term
• Shares
• Debentures
• Long term bank loans
• Grants
• Mortgage
• Government Grants
• Medium term
• Hiring and Leasing
• Hire purchase
• Short term
• Bank Overdraft
• Short Bank Loan
• Creditors
• Trade Credit

Retained Profit

• Advantages
• They are cheap.
• They are very flexible.
• They do not dilute the ownership of the company.
• Disadvantages
• Danger of hoarding cash.
• Shareholders may prefer dividends id the business is not earning a sufficient ROCE.
• High profits and cash flow would suggest the business could afford debt (higher gearing).

Owners funds

• Advantages
• Personal savings and other assets make a great source of capital.
• You already have them.
• Acquisition costs are minimal.
• You won't be paying interest on a bank loan or sharing returns with investors.
• Disadvantages
• If you plough your personal savings into a business venture, you could lose it all.
• Some assets, such as retirement accounts, are safe from creditors and bankruptcy courts; placing such assets at risk may not be good .

Bank Loan

• Advantages
• A bank loans money to a business based on the value of the business and its perceived ability to service the loan by making payments on time and in full.
• Banks do not take any ownership position in businesses.
• Bank personnel also do not get involved in any aspect of running a business to which a bank grants a loan.
• Once a business borrower has paid off a loan, there is no more obligation to or involvement with the bank lender unless the borrower wishes to take out a subsequent loan.
• Disadvantage
• Very difficult to obtain.
• Banks are careful to lend only to businesses that can clearly
• repay their loans, and they also make sure that they are able to cover losses in the event of default.
• Personal assets can be seized in the event the business fails and is unable to repay all or part of a loan.

Overdraft

• Advantages
• Timely Payments
• Less Paperwork
• Flexibility
• Benefit in Interest Cost
• Disadvantages
• Higher Interest Rate
• Risk of Reduction in Limit
• Risk of Seizing
• Debtors Collection becomes Lethargic

Mortgage

• Advantages
• Likely to be similar to or less than a rental payment on the same property.
• Monthly repayments will be predictable.
• You aren't exposed to any sudden, large rent increases.
• Interest payments on a commercial mortgage are tax-deductible
• any gain in value of the property will increase your capital.
• May be able to extend your existing premises, avoiding relocation costs.
• You have control over what alterations you want to make to the premises.
• Disadvantages
• Unlike renting, you'll need to come up with a substantial deposit
• If you own premises, you may find it harder to relocate
• If you have a variable rate mortgage, you are exposed to increases in interest rates.
• Owning a property means you'll be responsible for factors such as maintenance, fixtures and fittings, insurance, decoration and security.
• Any fall in the value of the property will decrease your capital.

Trade Credit

• Advantages
• It is easy and automatic source of short-term finance.
• It reduces the capital requirement.
• It helps the business focus on core activities.
• It does not require any negotiation or formal agreement.
• Disadvantages
• Trade credit is available only to those companies that have a good track record of repayment in the past.
• For a new business, it is very difficult to finance working capital through trade credit.
• It is very expensive, if payment is not made on the due date.

Government Grants

• Advantages
• They can provide huge monetary rewards with just one proposal.
• Some government grants can total in the millions of dollars.
• Those who receive government grants find it easier to raise money from other government and private sources.
• These grants can be prestigious and give your organization instant credibility and public exposure.
• Disadvantages
• Preparing government grant proposals usually require hard work and tons of research and planning.
• Government grants often come out with a set of rules for who are eligible to apply that can be so specific that it excludes many organizations.
• Tend to demand certain activities must be included in any project to be funded.
• Government grants are VERY competitive.
• Government grants come with quite a bit of regulation and red tape.

Hiring and Leasing

• Advantages
• Flexibility of repayment structuring is available.
• Leasing prevents the risk of an asset’s value depreciating quickly.
• Provides flexibility to enter into a new contract at the end of the original lease’s fixed term.
• Financing asset purchases can be more tax efficient than standard-term loans.
• High accessibility of financing for businesses due to the financing being secured with the leased asset and the asset being owned by the financing company.
• In certain circumstances there is maintenance included within the terms of the agreement.
• Disadvantages
• Total sum of capital payments for HP or leasing will be higher than the full payment on the asset purchase.
• Administrative complexity and costs will be greater if any covenants are applied to the arrangement.
• Early termination charges or restrictions on subleasing.

Hire purchase

• Advantages
• Often you can choose a fixed term and a deposit that fit your budget
• Often you can choose a fixed term and a deposit that fit your budget
• Seasonal repayments are also often available which means that you can tailor repayments based on your income if it varies at certain times of year.
• The rate of interest and monthly payments are fixed throughout the duration of the agreement
• A large payment at the end of the contract, known as a 'balloon payment' can also be used to reduce the monthly instalments
• Disadvantages
• You are in a fixed contract, and therefore if your financial situation changes during that period and you can’t afford the agreed monthly repayments, you may lose the asset.
• Overall, you will pay more for the asset, if compared to buying for “cash”, as you’re paying interest in addition to the cost of the product.